U.S. credit rating again in danger of downgrade

NEW YORK Mon Oct 7, 2013 3:40pm EDT

NEW YORK (Reuters) - The three main credit rating agencies have all warned, in varying degrees, the United States rating could be cut should it hit an expected October 17 deadline when Washington is set to run out of cash, endangering its ability to pay its debt.

As in 2011 when Democrats and Republicans in the U.S. Congress could not agree on a budget and spending measures, the full faith and credit of the United States is being put into question, and global markets are coming under pressure.

If the government does not increase its $16.7 trillion borrowing limit, it will not be able to issue debt to pay its bills, leading to a possible default.

In the strictest terms a default is not called until a payment on either interest or principal is missed, which means a default would not occur until some time after October 17.

The current status of each of the three major ratings agencies is as follows:

FITCH RATINGS:

Fitch Ratings has the U.S. government's credit rating at AAA, but it is currently the only one of the three with a negative outlook on the United States, having held such an outlook since November 2011.

Fitch said on October 1 the partial shutdown of the U.S. government is not itself a trigger for downgrading its rating. However, they said last week that the U.S. rating is at risk because failure to raise the debt ceiling sufficiently in advance of the deadline raises questions about the full faith and credit of the United States to honor its obligations.

"This 'faith' is a key underpinning of the U.S. dollar's global reserve currency status and reason why the U.S. 'AAA' rating can tolerate a substantially higher level of public debt than other 'AAA' sovereigns," Fitch said in an October 1 note.

Fitch said if the debt ceiling isn't raised in a "timely manner," meaning several days prior to when the U.S. Treasury says it will have exhausted extraordinary measures and cash, it will launch "a formal review of the AAA rating and likely lead to a downgrade." Some on Wall Street believe the firm could cut even if a deal is reached in Congress.

"Depending on how contentious the negotiations are, there is an increasing probability that Fitch downgrades the rating from AAA to AA as the 'x' date is approached," Bank of America Merrill Lynch wrote in a note to clients on October 1.

However, even in that case Fitch believes U.S. Treasury securities will be honored in full and on time. Fitch could change the rating to "restricted default," and then later assign a new rating, reflecting the temporary default status.

Fitch's current view on the rating and outlook was affirmed on June 28th, meaning there is a 12 to 18 month window in which to decide on the rating.

MOODY'S INVESTORS SERVICE:

Moody's has a Aaa rating with a stable outlook on the United States, saying it believes the government will pay interest and principal on its debt obligations, even if the debt limit is not raised by October 17, "leaving its creditworthiness intact."

In 2011, Moody's said nothing short of a missed payment on U.S. Treasuries would prompt the firm to cut the rating to the Aa range. It has not stated any change to that viewpoint.

Moody's stresses that even passing the October 17 date does not immediately result in a default as the next Treasury interest payment is due October 31 and at $6 billion is "probably quite manageable under any circumstance," Steven Hess, lead U.S. sovereign credit analyst at Moody's, told Reuters on Monday.

Failure to increase the ability for the government to issue debt to pay its bills could "theoretically affect all categories of government spending, including debt service."

On July 18, 2013 Moody's revised its outlook on the United States to stable after two years with a negative outlook.

STANDARD & POOR'S:

Standard & Poor's is the only rating agency among the big three to have cut the U.S. credit rating, lowering it to AA-plus from AAA in 2011. It currently has a stable outlook on the United States.

If U.S. government debt is not serviced, S&P said it would lower the rating to selective default, or SD. It would remain there until delinquent principal and interest payments are made.

On August 5, 2011 S&P took the unprecedented action of cutting the rating by one notch to AA-plus because of its concerns over the government's budget deficit and rising debt burden.

The cut occurred even after the U.S. government raised the debt limit in 2011. S&P cited the breakdown in the ability of the Democratic and Republican parties to govern effectively for the downgrade.

S&P said it would not anticipate a change to the rating if the current impasse is short-lived.

"This sort of brinkmanship is the dominant reason the rating is no longer AAA," S&P said on September 30.

(Reporting by Daniel Bases; Editing by Chris Reese)

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